Bank of America Throws a Lifeline to Underwater Homeowners

Bank of America (BofA) is taking steps to write down mortgage principal owed by thousands of underwater homeowners in what has been termed “the mortgage industry’s boldest move yet” to resolve the nation’s foreclosure problem. Bank of America can well afford the initiative.

According to Betsy Graseck, a Morgan Stanley analyst, the ultimate cost of principal reductions is “immaterial” because the majority of the $10 billion pool of loans that are eligible for the write-downs are no longer carried on Bank of America’s balance sheet. BofA holds just $1.5 to $2 billion of eligible loans and has already reserved against expected losses on these mortgages. The loans are among the most exotic and risky subprime products that were available during the housing boom. One is the Option ARM, which originated with an extremely low interest rate and resets at a significantly higher level after a few years. The rest of the eligible loans – inherited by BofA through its 2007 acquisition of Countrywide Financial – are already securitized and investor owned.

Although the move is giving BofA valuable free publicity, it results from a settlement between the attorney generals of several states and the bank. Even though some investors complained it wasn’t fair for BofA to agree to the modifications since they were not assuming the majority of the losses, the AGs refused to give up. BofA is trying to placate the investors by assuring that the modification amounts will be reduced if house prices recover in the next few years. Additionally, the BofA program is being called a archetype for other lenders.